HMRC dynamic coding causes issues for taxpayers

From July this year, HM Revenue & Customs (HMRC) has been utilising its new system of dynamic coding, which allows for in-year adjustments (IYAs) of a person’s tax code. 

Under the new regime, codes can be adjusted by the Revenue to reflect sudden changes in an employee’s circumstances as soon as HMRC becomes aware of the changes, rather than waiting to reflect this in the following tax year. 

In order to make the IYAs, HMRC relies on two important concepts, estimated pay and trigger points, to calculate the new code.

Estimated pay is effectively a person’s annualised year to date pay and this is used to perform the calculations to arrive at the new tax code. The same procedure is used for monthly paid employees, but based on average monthly income.

However, the PAYE code will only be amended if employers notify HMRC of a trigger point, where an employee’s circumstances have changed.

This could include an individual changing their personal tax account, or an employer notifying the Revenue of a change, which will typically take place during a payroll report or through a number of different forms. 

Bonuses and one-off payments must be included in an employee’s estimated income for the year. However, many are finding that current payroll software does not contain a facility to tell HMRC that a payment is a one-off, which has led to the misinterpretation of payments. 

In response, the Institute of Chartered Accountants in England and Wales (ICAEW) is warning employees and employers to check their tax code where a bonus or one-off payment has been made to ensure it doesn’t cause unwarranted restrictions of personal allowances or overpayments of tax. 

LINK: HMRC’s guidance on tax codes

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